Posted on March 19, 2015 - 03:35 PM
by Paul Brenot
HARRISBURG, Penna. – March 13, 2015 – Not long ago, I (Brett Woodburn, Esq.) read an article published on Inman.com that discussed the pitfalls of pre-printing the name of a title company on an agreement of sale. The article was well written, and by and large, I agree with the author's conclusions. The message is important, so much so that it bears repeating, albeit with a slightly different focus.
Real estate brokerages have been fostering business relationships with other settlement service providers in an effort to provide the full panoply of real estate services under one roof – real estate broker, mortgage lender, title company. When the Realtor®, lender and title agent are all on the same team – the buyers' team – the whole process of buying a home is bound to be easier and less expensive.
Bundling services and joint marketing and advertising are a great way for a buyers' agent to provide buyers with the services they will need in one place. In some offices, the buyers' broker has an affiliation or is part of a joint venture with one or more of these service providers. Since the broker (agent) has a vested interest in the company, it only stands to reason that the agent will strive to ensure that the transaction goes off without a hitch.
What better way to "recommend" a service provider than to pre-fill the name of the lender, inspector and/or title company in the Agreement of Sale? Of course, we all know that the buyers have the ultimate say, but isn't part of the agent's job to make the transaction smooth and painless; efficient? But efficiency can come with a cost.
The Real Estate Settlement and Procedures Act (RESPA) is the most important federal law governing residential real estate transactions. Its main purposes are two-fold: (i) provide advance disclosure of closing costs to the buyers; and (ii) prohibit kickbacks and unlawful fee splitting. RESPA makes it illegal to pay someone, or to get paid for referring someone, to a settlement service provider; e.g., mortgage broker or title company.
RESPA does offer a safe harbor for referrals made to an affiliated business. In order to take advantage of the safe harbor, the referring party (i) must make a written disclosure at the time of the referral; and (ii) must not require the buyers to use the affiliated business. RESPA includes the language required to be part of the disclosure, which should eliminate much of the confusion about how the disclosure form should be drafted.
Seems pretty straightforward, right?
RealtySouth, one of the largest real estate brokerages in Alabama, had an affiliated business relationship (AfBA) with TitleSouth, a title insurance and closing company. RealtySouth "strongly encouraged" its agents to refer buyers to use TitleSouth. To facilitate the process, from March 2011 through May 2012, RealtySouth pre-printed TitleSouth on the agreement of sale, identifying it as the title insurance and closing company for buyers. In 2012, RealtySouth moved away from that practice to instead include two check boxes, offering buyers the option of selecting either TitleSouth or "other" to provide title insurance and closing services.
RealtySouth did provide a disclosure to its buyers, and it was based on the proscribed form found in RESPA. However, RealtySouth added language like, "We at RealtySouth believe our affiliates provide superior service, value and convenience…" and "We believe that our affiliates' charges are reasonable and are competitive with the amounts charged by others for the same services…" While these statements may have been accurate, they were certainly not in the form proscribed in RESPA.
The Consumer Financial Protection Bureau (CFPB) is charged with the responsibility of enforcing RESPA violations. The CFPB learned about the practice of pre-identifying the title company, and it received a copy of the disclosure that RealtySouth was using. Following the investigation, the CFPB ordered RealtySouth to use the proscribed disclosure form without any additional marketing language, and to pay a $500,000 fine. The CFPB concluded that RealtySouth violated RESPA's prohibition against kickbacks and fee splitting because RealtySouth did not qualify for the safe harbor protection.
In an effort to be "efficient," RealtySouth pre-selected the title company for its buyers. (Offering a choice between TitleSouth and "other" wasn't much of a choice, either.) By doing this, RealtySouth interfered with the buyers' rights to choose their own title company, and by inserting marketing statements into the disclosure, RealtySouth watered-down the effectiveness of what was being disclosed. Having the alleged violations in print made for a very efficient prosecution.
About the Author: Brett Woodburn, Esq. is an attorney with Caldwell & Kearns and serves as general counsel to the Pennsylvania Association of Realtors (PAR). A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline.
This article was originally published for PAR's Just Listed, an email service of the Pennsylvania Association of Realtors.